ACIT, NEW DELHI vs. M/S. MINDA CORPORATION LTD., DELHI

Ld. AR, however, at the time of arguments not pressed ground No. 2 and proceeded to arg ue ground No. 1 on the above lines. W hat, therefore, effectively fall s for our consideration i n this appeal is the issue rel ating to the disallow ance of commissi on paid by the assessee to Minda Europe BV Ld. AR submitted that as per the terms of the agreement between the assessee and the Mi nda Europe BV, Netherlands, the Minda Europe BV was responsible for carrying out presale activiti es and post sale activities on behal f of the assessee and appointed as an agent for assi sting the assessee in identi fying the prospective customers and affecting sales outside I ndia i n the European mark et ex clusively for w hi ch they are entitled to receive the commission at 3% on export sal es. He, therefore, submits that under section 195 of the Act, an obligati on i s cast on a person making payment to a non-resident of any sum, which is chargeable under the provi sions of the Act, to deduct tax at the rates i n force, at the time of payment of such sum or at the time of credit thereof to the account of the Payee, whi chever i s earlier and in view of the deci sion of the Hon’ble Supreme Court in the case of GE I ndia technol ogy Centre (P) Ltd v s. Ld. CIT(A) 327 IT R 456 only if the income is chargeable to tax in India in the hands of the non-resident recipients, then only the tax would be required to be deducted at source for such pay ments. Placing reliance on the deci sion of the Hon’ble Apex court in the case of Ld. CIT(A) vs. Toshok u Ltd., 125 ITR 525 and of the Hon’ble juri sdicti onal High Court i n the cases of Ld. CIT(A) v s. Eon Technology priv ate li mited 343 IT R 366 (del), DIT vs. Panal fa Autolectrik Ltd 227 taxman 371 (Del) and CIT vs. Angelique international Ltd., 359 IT R 9 (Del) and Arti cle 12(5)(b) of the DTAA between I ndia and Netherl ands, he submitted that the commission paid to the foreig n enti ty does not constitute the ‘Fee for Techni cal Services’ (FTS) and i s not l iable to be brought to tax in I ndia.

W e have g one throug h the record. It could be seen from the assessment order that on a perusal of the agreement and details submitted by the assessee, learned assessi ng offi cer found that the Minda Europe BV i s a subsi diary company of the assessee and has been engaged in the business of rel ationship management parti cularly to customer devel opment, new busi ness with their existi ng customer, getting request for queries (RFQ ), Price neg otiati on, getti ng approv al from customers and settling issues with customers in European market exclusively ; and that it tak es care of European market plans, marketi ng prog rams, quality and customer satisfacti on survey s, gui delines of European marketing and branding policies etc.

Accordi ng to the assessee Minda Europe BV is worki ng as an agent of the assessee company in the European market, and therefore T DS i s not applicable and the clai m of the assessee is justifi ed. Learned AO recorded that the abov e servi ces are i n the nature of technical, manag erial and consultancy servi ces as per the provisi ons of section 9(1)(vii) (b) of the Act Explanati on-2 of the Act and are not merely procuring sales for the assessee, rather they are i n the nature of techni cal, managerial and consultancy servi ces. On thi s premi se learned 5 Minda Corporation Ltd. AO held that the expenditure has to be di sall owed as per the provisi ons of secti on 40(a)(i) of the Act as thi s amount is covered under the provi sions of secti on 195 (1) read with secti on 9(1)(vii)(b) of the Act Explanati on 2.

It is, therefore, clear from the above line of judi cial pronouncements that any commissi on paid to the ag ent outside I ndia for the services rendered outside Indi a do not constitute the ‘Fee for Techni cal Servi ces’ (FTS) within the meaning of secti on 9(1)(vii) of the Act.

Now turni ng to the ‘make available’ clause, the i ssue in this matter is cov ered by the DTAA betw een India and Netherl ands. We have g one throug h the provi sions of the double taxation avoidance ag reement of India with Netherlands. Article 7 (6) thereof reads that w here profits incl ude items of i ncome w hich are dealt with separately in articl es of this convention, then the provisi ons of those arti cles shall not be affected by the provisi ons of this Arti cle; and that Article 5 (7) read that the fact that a company whi ch i s a resi dent of one of the states controls or i s controlled by a company whi ch i s a resident of other state, or w hi ch carries on business in that other state (w hether through a permanent establishment or otherwise), shall not of itsel f constitute 6 Minda Corporation Ltd. either company a permanent establishment or the other. Article 12 thereof deals with roy alties and fees for techni cal servi ces. Arti cle 12 (1) says that royalties and fees for technical servi ces arisi ng i n contracti ng state and pai d to a resident of the other contracti ng state may be taxed in that other state, whereas sub arti cle (5) says that for the purpose of thi s arti cle ‘Fee for Technical Services’ means pay ments of any kind to any person i n considerati on for the rendering of any techni cal or consultancy servi ces (i ncl udi ng through the provisi on of servi ces of technical or other personnel) if such servi ces: (a) are ancillary and subsidiary to the application for enjoy ment of the rig hts, property, or information for w hich a pay ment described in paragraph 4 of this article is received; or (b) ‘make avail able’ techni cal knowledge, experience, skill know-how or processes, and consist of the development and transfer of a technical pl an or a technical desig n.

T he questi on of appli cability of Arti cle 12(5)(b) of the DTAA to a situation like thi s, where ‘make av ailable’ cl ause i s there and has been consi dered by the Hon’bl e jurisdi cti onal Hig h Court i n the case of DIT vs. Guy Carpenter and company li mited 346 I TR 504 (Del hi) i n the lig ht of article 13 (4) (c) of the DTAA between I ndia and United Ki ngdom which is in pari materia with the article 12(5)(b) of the DTAA between India and Netherlands, and the Hon’ble juri sdicti onal High Court held that, - A plai n reading of Arti cle 13(4)(c) of the DT AA i ndicates that 'fees for techni cal servi ces' w oul d mean payments of any kind to any person in considerati on for the renderi ng of any technical or consultancy servi ces whi ch, inter ali a, "mak es availabl e" techni cal knowledge, experience, skill, know-how or processes, or consi st of the devel opment and transfer of a technical plan or techni cal desi gn. According to the Tribunal thi s "make avail able" conditi on has not been satisfied inasmuch as no techni cal k nowl edge, experience, skill, know -how, processes, have been made av ail able by the assessee to the insurance compani es operating in Indi a. It also does not consi st of the development and transfer of any techni cal plan or technical desig n. 14. ‘M ake av ailable’ clause in Arti cle 12(5)(b) of the DTAA between India and Netherlands w as considered by the Hon’ble Karnatak a Hig h Court in the case of C.I.T. Vs. De Beers India Mineral s Private Li mited 346 IT R 467 (Karnataka) and Hon’ble court held that Articl e 12(5) of the DT AA defi nes “fees for techni cal services” to mean pay ments in consi deration for the renderi ng of any techni cal or consultancy servi ces “whi ch make av ailable technical knowledge, experience, etc or consist of the development and transfer of a techni cal pIan or techni cal design. To be said to “make availabl e”, the servi ce shoul d be aimed at and result in transmitti ng techni cal k nowledge etc so that the payer of the servi ce could derive an enduri ng benefit and utilize the knowledge or know -how on hi s own in future without the ai d of the service provider. In other w ords, to fit into terminology “maki ng avail able”, the technical knowledge, skills” etc must remai n with the person receiving the service even after the parti cul ar contract comes to an end. It is not enoug h that the services offered are the product of i ntense technol ogi cal effort and a lot of technical knowledg e and experience of the service provider has g one into it. The technical k nowl edge or skills of the provider shoul d be i mparted to and absorbed by the receiver so that the receiver can deploy similar technol ogy or techniques in the future without depending upon the provider. On facts, w hile the Dutch company performed the survey s usi ng substanti al technical skills, it has not made availabl e the technical ex perti se i n respect of such collecti on or processi ng of data to the assessees, whi ch the assessee can apply independently and without assistance and undertake such survey 7 Minda Corporation Ltd. independently. Consequently, the consideration is not assessable as “fees for techni cal services”.

Since, the matter stands adjudicated for earlier years and in the absence of any material changes in the facts of the case, we hereby decline to interfere with the order of the ld. CIT(A).

The Second addition pertains to warranty charges of Rs.18,29,678/- which was adjudicated by the Co-ordinate Bench of ITAT in assessee’s own case for the assessment year 2001-02 in dated 28.07.2006. Similarly, for the assessment year 2005-06 in assessee’s own case in ITA No. 4705/Del/2009, the addition made by the assessee is deleted.

We find that the Hon’ble Supreme Court has settled the controversy of the claim of warrant expenses while delivering judgment in the case of Rotork Control India Pvt. Ltd. Vs CIT (2009) 314 ITR 62 (SC). The Hon’ble Court has held as under: “For determining an appropriate histori cal trend, it is important that the company has a proper accounting system for capturi ng relati onship between the nature of the sales, the w arranty provi sions made and the actual expenses incurred ag ainst it subsequently. T hus, the decisi on on the w arranty provi sion shoul d be based on past experience of the company. A detailed assessment of the warranty provisi oni ng poli cy i s requi red, particularly if the experience suggests that warranty provi sions are generally reversed i f they remain unutilized at the end of the peri od prescribed in the warranty. Therefore, the company should 8 Minda Corporation Ltd. scruti nize the hi storical trend of warranty provi sions made and the actual ex penses incurred ag ainst it. O n thi s basi s, a sensibl e estimate shoul d be made. T he warranty provi sion for the products should be based on the estimate at the yearend of future warranty expenses. Such esti mates need reassessment every year. As one reaches close to the end of the warranty peri od, the probability that the w arranty ex penses will be incurred is considerably reduced and that should be reflected in the estimation made. Whether thi s should be done through a pro rata reversal or otherwi se w ould require assessment of histori cal trend. If warranty provi si ons are based on experi ence and histori cal trend(s) and If the w orki ng is robust, then the question of reversal in the subsequent two years, in the above example, may not arise in a sig nifi cant w ay. Hence, on the facts and circumstances of the instant case, provi sion for warranty w as rig htly made by the assessee because it had incurred a present oblig ati on as a result of past events. There was al so an outfl ow of resources. A reliable estimate of the obligation was also possible. Therefore, the assessee had incurred a liability duri ng the relevant assessment y ears and it was entitled to deduction under secti on 37. Therefore, all the three conditions for recognizi ng a liability for the purpose of provi sioning stood sati sfied in the instant case. T here are four important aspects of provisi oni ng, vi z., provi sioning which relates to present obligati on; it ari ses out of obligating events; it i nvolv es outfl ow of resources; and lastly, it inv olves reliable estimation of an obligati on. Keepi ng in mi nd all the four aspects, the Hig h Court should not to have interfered with the deci sion of the Tribunal in the instant case. From analy sis of the various deci sion of the Supreme Court, in w hich a similar issue w as decided, the principle w hi ch emerges i s that if the histori cal trend indicates that a large number of sophi sticated g oods were being manufactured in the past and i f the facts established show that defects existed in some of the items manufactured and sold, then the provi sion made for warranty in respect sophi sticated goods w ould be entitled to deducti on from T he gross receipts under secti on 37. It would all depend on the data systemati cally mai ntai ned by the assessee.”

Ground No. 4 pertains to disallowance on account of depreciation on printer.

The Assessing Officer treated the printers as general plant & machinery and allowed the depreciation at the rate of applicable to plant & machinery which is 15% whereas the printers are considered as part of the computer equipments by the Hon’ble High Court of Delhi in the case of BSES Rajdhani Power Ltd. wherein depreciation of 60% is allowed. Hence, keeping in view, the factual contents and the orders of the Hon’ble High Court, we hereby hold that the depreciation @ 60% be allowed to the printers which is a part of composite unit of computer.

In the result, the appeal is dismissed. (Order pronounced in the open Court on 11.07.2019)